April, 2015

MY BIG FIVE MONEY MISTAKESby LARRY

1. Starting in 1986, Valerie and I owned our own home but were paying over a $1,000 a month on the mortgage, taxes, and insurance for it. It cost us about $89,000 and today is still only worth about $100,000 more than that. A few years after we bought it, the bottom fell out of Austin real estate. We could have bought a place at least half again as large and nice for the same amount we spent on this one. Had we but held off investing in a house till prices were down instead of buying close to the then top of the market, chances are the appreciation on the larger place we might have bought would have been at least twice as great as we have seen on this little house, lovely as it is.

2. By early 1987, Valerie and I, now with combined incomes, had begun to set aside money for investing. I had as yet little real experience with buying stocks (as opposed to mutual funds), but thought I understood things a lot better than was actually the case. For example, I was delighted to discover that our brand new Schwab discount brokerage account came with a wonderful thing called "margin." As I invested in equities I had increasing buying power for purchasing still more shares without having to put in any more cash! How great was that? Believing I was a good stock picker, I merely kept purchasing till most all the buying power was used up. In October of that year, a market crash occurred, and between the close of trading one day and a few minutes after the open the following day, through regular losses and the need to cover our pending margin calls, we lost half of our net worth. An expensive lesson. Had I on the other hand genuinely learned about investing in a less traumatic way, kept a rainy day fund, and obtained roughly half as much in the months prior to the crash, we could have gotten many more shares when prices were down, rather than buying high and selling at one of the lowest points. With compounding factored in, today we might have around half a million dollars more in our accounts as a result. Of course, the shock of that debacle caused me to take this money management enterprise a lot more seriously and led to a subsequent focus on value investing. It has served us well.

3. My number three costliest money and investing error was in not following my dad's and paternal grandfather's advice, to begin investing early. Starting back in the mid-1960s, there began to be now and then a few extra dollars that I might have invested. Had I just from then on put all my available cash (besides normal living expenses) into a low cost mutual fund that held the S&P 500 Index, Val and I would have at least $1,000,000 more to help us live comfortably in retirement.

4. My second worst mistake with money and investing was in not realizing my name is not Warren Buffett. I first learned what a terrific investor he is back in the 1980s, about the same time I finally got into the investing game myself. Yet I must have thought I could do just as well as he, for it was several more years before I even bought the lower cost Class B shares in the company Buffett runs, Berkshire Hathaway.

In April, 1985, that company's shares (which would become BRK/A shares) sold for about $1900 a share. A single share of BRK/A today sells for around $213,000. Had I from the outset and through the subsequent years simply put all the investment funds that I, and a little later Valerie and I together, had into Buffett's company and had we but retained those shares, so none of the returns would have gone to Uncle Sam, our nest egg would be richer by at least $2,000,000. D'oh!

5. There is a big difference in the performance of a big portfolio, with many average stock names, and one that is concentrated in a few winners. I have over the decades tended to be a restless investor, often experimenting as I sought better strategies. Indeed, this has resulted in our finding a few approaches that do well. However, it has been at the cost of acquiring along the way a number of shares of mediocre companies. Their results have dragged down our overall returns by maybe as much on average as 5% a year. Over a 30-year period, the difference on a $50,000 investment between, say, 12% and 17% in total return annually is over $4,000,000. My worst investing error was in understanding too late that sometimes the simple tortoise-like technique of only sticking with a few great companies that can be bought from time to time at bargain prices beats the heck out of the more frenetic and complicated hare-like method of buying whatever looks good at the moment because this or that system temporarily appears superior. Live and learn.

On the bright side, maybe there is still time to profit from awareness of these costly faux pas.

DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)